Comparative Research Of Tests For Rational Bubbles In Stock Markets

Currently, we can use a lot of methods for testing rational bubbles, but different methods often deduce different and even contrary conclusions. These contrary conclusions often make economists and authorities feel difficult to choose methods correctly from a plethora of tests. Then you will ask which test is the best method? But so far there is no unanimous opinion for it. This paper does comparative analysis with four testing methods by combining theories analysis and empirical analysis together.Generally speaking, bubbles refer to the part which stock price is apart from fundamental value. And fundamental value is often considered to equal the sum of expected dividends stream in the future. Because the definition is got from arbitrage condition under the precondition hypothesis of rational expectation, the bubbles are also called rational bubbles. According to the characteristics of bubbles, they can be sorted into three kinds. They are Markovian bubbles, intrinsic bubbles and extrinsic bubbles. The rational bubbles' solutions are very complicated and there are no enough tests for all of the solutions so far. These tests can be ranged two categories. One is for testing rational bubbles in general and the other is for determinative bubbles and intrinsic bubbles. The extrinsic bubbles are not included because there are no tests for them.The empirical part goes on the base of theories above with four common and typical testing methods and concludes by comparing their beliefs, precondition hypotheses and empirical results. The variance bound test is specially designed for effective market but rational bubbles. The specification test is a charming test and can make rational bubbles be the only possible reason by excluding other misspecification. And its conclusion is persuasive. Unit root test and cointegration test had better not be used separately and they can be supplement for other tests. And as one of direct testing methods, the intrinsic bubbles test can specify rational bubbles directly and can conclude that there exist intrinsic bubbles as long as the coefficient are significant in statistics. And its process is much easier than specification test. In a word, the test for intrinsic rational bubbles is the best method in all of these four tests and the specification test is the next.Besides, this paper also points out the weaknesses of these rational bubbles tests and believes that the tests for bubbles can be considered as asset pricing in nature.